Peru’s pension industry is facing a proposal that would do away with the country’s four AFPs and create a single entity to manage savers’ money.
A committee mandated by the Peruvian Finance Ministry to review the country’s pension system has released a non-binding plan to ‘centralize’ pensions-related administrative tasks under one entity and outsource investments to asset managers, effectively proposing to eliminate the country’s $47 billion AFP system.
Under the current setup, each of Peru’s four pension funds independently gather savers’ money, provide customer service and design and execute investment strategies.
The proposed scheme by the committee, named the Social Protection Commission, would see the central entity award mandates to local or international managers for five to seven years, according to a the report outlining its plan. Fees charged to savers would be set during the bidding process for the mandates.
In its report, the commission said the changes could ensure better pensions for Peruvians.
‘The waste of economies of scale and the AFPs’ oligopolistic market hampers cost cutting that could easily translate into lower fees for savers,’ said the commission in its report.
‘It also enables high-profit rates for the AFPs, compared to rates for banks or for insurers even if in comparison to these entities, the AFPs take on very little risk (the saver absorbs most of the investment risk.)’
It said the AFPs have been using tactical rather than long-term investment strategies because the system requires a set minimum return and limits foreign investment. Such an approach has hurt savers' returns, it concluded.
The Social Protection Commission was set up in January 2017 to improve the pension system as well as expand coverage throughout Peru.
In response to the report, the president of the local AFP association, Giovanna Prialé, told local news outlets that the proposal could signal a move toward a 'nationalization of pension funds,' as the proposal leaves the door open for the central entity to be public or private.
Despite the fears, rating agency Moody's said the reform could support Peru's A3 rating because it could reduce government liabilities and boost mid-term growth, according to Peruvian news outlet Gestión.